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Sunday, 16 March 2014

Bill Would Free Insurance Firms from Bank Capital Rules of Insurance Products at Dyman and Associates

Senator Susan Collins, a
Maine Republican, said at a Senate Banking subcommittee hearing today that her
2010 provision was not intended
to subject insurance companies to the same capital and liquidity standards
as banks.

“While it is essential
that insurers subject to Federal Reserve Board oversight be adequately
capitalized,” Collins said at the hearing, “it would be improper, and not in
keeping with Congress’ intent, for federal regulators to supplant state-based
insurance regulation with a bank-centric capital regime for insurance
activities.”

The provision of the
Dodd-Frank overhaul of U.S. financial regulation requires the Fed to set
minimum capital and leverage standards on non-bank firms, including insurance
companies like Prudential Financial Inc. (PRU: US)

Collins said insurers
engaged in activities regulated as insurance at the state level would be
exempted from the Dodd-Frank capital requirements under her bill.

Insurance companies say
bank capital standards don’t fit their business and submitted testimony to the
subcommittee to press their case for an amendment.

“It’s a difference in the
fundamental business model,” Julie Spiezio, senior vice president of insurance
regulation and deputy general counsel for the American Council of Life
Insurers, said. “It’s like trying to put the safety standards of airplanes on
cars.”

Fed Agreement

Federal Reserve Chair
Janet Yellen and her predecessor, Ben S. Bernanke, have said they agree that
insurance companies should meet different capital standards than banks.

“We recognize that there
are very significant differences between the business models of insurance
companies and the banks that we supervise, and we are taking the time that’s
necessary to understand those differences and to attempt to craft a set of
capital and liquidity requirements that will be appropriate to the business
model of insurance companies,” Yellen said at a Feb. 27 hearing.

However, Fed officials say
the language of Collins’ original provision limits their ability to develop a
different capital regime for insurance companies.

‘Some Constraints’

“The Collins Amendment
does restrict what is possible for the Federal Reserve in designing an
appropriate set of rules,” Yellen said.

Collins said she believes
the 2010 provision gives the Fed adequate authority to tailor the requirements
to the insurance industry.

“I do not believe
legislation is necessary,” Collins said in an interview following her testimony
to the panel. “I believe the Fed could have solved this if it wanted to.”

She predicted that her
bill and a similar measure by Ohio Democrat Sherrod Brown, who led today’s
hearing, and Nebraska Republican Mike Johanns, would be consolidated into one
measure.

“I believe in the end that
we are going to come together on a single bill and that’s my goal,” she said.
“We’ve resolved a lot of issues over the past few months but we still have a
couple of issues to come to consensus on.”

The Brown-Johanns bill,
which has 23 co-sponsors, has yet to gain approval by the committee.

‘Bipartisan Agreement’

“There is broad,
bipartisan agreement that providing traditional insurance is different from
banking,” Brown said in an e-mailed statement yesterday. “Capital rules must
accurately measure and address the risks of the businesses to which they are
being applied.”

Former Federal Deposit
Insurance Corp. Chairman Sheila Bair has cautioned against congressional action
and said lawmakers should instead wait on the Federal Reserve to act. In a
letter to Brown yesterday, Bair said the bill would give insurance companies “a
significant competitive advantage over banking organizations engaged in the
same activities, and leave the door open to the kinds of highly leveraged
risk-taking which contributed to the 2008 crisis.”

President Barack Obama’s
administration has previously opposed any legislation to amend Dodd-Frank.

Right Time

“I do recognize the
concern about opening up Dodd-Frank when there has not been sufficient time to
evaluate its impact,” Rodgin H. Cohen, senior chairman of Sullivan &
Cromwell LLP, which represents Metlife Inc. (MET: US) and other insurance
companies, said in testimony prepared for the subcommittee. “But, if there were
ever to be any change, this is the time and place to do so.”

The Financial Stability
Oversight Council last year designated Prudential and American International
Group Inc. (AIG: US) as systemically important financial institutions, or
SIFIs, which would subject them to the Fed’s capital rules. MetLife Inc., the
largest U.S. life insurer, has said it’s in the final stage of consideration
for the risk tag.

Designation as a SIFI
subjects companies to added scrutiny of capital levels, liquidity and leverage
from the Fed even as U.S. insurers are primarily overseen by state regulators.
MetLife said in its annual filing that being deemed systemically important
could limit the company’s ability to pay dividends or repurchase shares.

The need for a taxpayer
rescue of AIG in 2008 helped convince regulators that more supervision is
needed for nonbank firms. AIG almost failed amid losses in its Financial
Products unit, which wasn’t overseen by state regulators.